Was I Wrong About Amazon.com?

Every once in a while we need to take a step back and take a fresh look at our investments, particularly ones we may have gotten wrong. Today I'm doing that with Amazon.com (NAS: AMZN) , a stock I have been negative on all year and shorted earlier this year. My short position is contrarian to not only many of my fellow Fools, but also some of our most successful newsletter services -- which have made a killing on Amazon.

So am I wrong? Was my thesis incorrect? Or is the market just crazy? These are questions I have to answer.

The numbers tell all ... sort ofFirst I looked at the company's financial trends. The following chart shows revenue growth and net income over the past five years. Revenue growth has declined for the past year, and profits are down from their peak at the end of 2010. Declining earnings are supposed to be a bad thing for a company, right?

Not only have financials gotten worse over the past year or two, but the company also expects them to be even worse in the third quarter. Revenue growth is expected to be between 19% and 31% in the third quarter of this year, likely another decline from last quarter. Operating loss is expected to be between $50 million and $350 million, down from an operating profit of $79 million last year.

Are any of the company's new products making an impact?Amazon in dominant in online retail, but many think it has real potential in a few new markets.

Online streaming is one thing Amazon has tried its hand at, but as a subscriber to Netflix (NAS: NFLX) and an Amazon Prime user, I don't find Amazon compelling in the least. It honestly seems like a bad effort to get into a business that everyone identifies as a huge growth opportunity. Comcast has done a better job with Xfinity, Hulu is a popular alternative that is easy to use, and Apple (NAS: AAPL) reportedly has its eyes on turning this market upside down. As Netflix found out, even a large stable of users doesn't make profitability in streaming a slam-dunk. There's potential here, but not enough to worry me about my short call.

Tablets are another area that many have identified for growth, but if fellow Fool Evan Niu's recent post is correct, the sales numbers are terrible. Amazon has had to subsidize Kindle sales just to get into the market, and the competition is just starting to heat up. Apple is reportedly preparing a 7-inch tablet to go along with its dominant iPad, Samsung's lineup of tablets is garnering a reaction even from Apple, and Google's (NAS: GOOG) Nexus 7 is another solid competitor. Amazon is supposed to release a new Kindle Fire next week, but I still have doubts about whether it will be a big player in the table market. At the very least, Amazon hasn't ridden its sales to considerable profits yet.

Amazon Web Services shows a lot of potential, and if there's anything that worries me, it's that this becomes a big business. What's hard for me to judge is exactly what the financial impact will be long-term on a business that has generated $54 billion in sales in the past 12 months. Last quarter, non-retail sales (which includes AWS) accounted for only 4.3% of sales, although it grew faster than 50% annually. I'll mark this up as a worry for my pick, but not a dealbreaker yet.

Final assessmentTo me, Amazon still looks a lot like two former All-Stars on the market: Netflix and Green Mountain Coffee Roasters (NAS: GMCR) . Both of these stocks traded at crazy P/E multiples before crashing to Earth, as growth didn't live up to expectations.

Amazon may not be in for the same kind of disastrous fall, but the company hasn't shown the ability or the desire to beef up the bottom line, choosing to expand its reach instead. Until Amazon can prove its ability to make a consistent profit on continually growing sales, I'll stay the course. I think the market is being irrationally exuberant with this stock and eventually my short call will pay off.